What is a private lender?
When it comes to financing a new home, there is money available beyond the bank. Private lenders are a viable financing option that many homebuyers often overlook.
What is a private lender?
Private lenders are entities not tied to a bank or credit union who loan money to individuals or businesses. A private lender can be an individual person, a small group, or a larger company. While private lenders can finance a variety of different loans, they most commonly finance personal loans and real estate loans.
How do loans from private lenders work?
A loan from a private lender works the same as a loan from a larger financial institution; after applying and being approved, the individual receives the funding for their loan. This can allow them to purchase a home, consolidate debt, make home improvements, and more. Just like a bank or credit union, the amount is then paid back in monthly installments with interest over an agreed-upon amount of time.
What are the benefits of private lenders?
Many private lenders have much faster approval times than larger financial institutions. This is due to a streamlined, more informal application process and significantly smaller size. Likewise, private lenders are often more willing to work with people who may struggle to get approved by traditional financial institutions. Those with low credit scores, past foreclosures, or varying income due to a small business may be more likely to receive financing through a private lender.
Are private lenders legal?
It is absolutely legal for organizations other than banks or credit unions to lend money. Like other financial institutions, private lenders must comply with the usury and banking laws of the states in which they operate; this helps regulate the interest rates and fees that they can charge borrowers. Likewise, in some states private lenders may be limited on the amount they can loan without a banking license.
Private lending companies versus individuals
Like banks, private lending companies make a profit off of the interest borrowers pay on their loans. Many private lending companies are online lenders that conduct their business entirely online. Examples of private lending companies include LightStream, Best Egg, LendingPoint, Avant, Prosper, and more.
Individual private lenders are individual people; they may be investors looking to earn a profit, or someone known to the borrower willing to “help out” with the funding. Individual private lenders tend to fall into three circles:
- Primary circle: The primary circle are people the borrowers know directly such as family members, friends, or colleagues.
- Secondary circle: The secondary circle are acquaintances and friends of friends; these are usually people the buyers have a connection with but may not know as well.
- Third party circle: The third party circle are accredited investors that they buyers don’t know. Connections between these individuals and borrowers are often made through “peer-to- peer” lending sites that make these connections online.
by Author, Sep. 30, 2020